George G. Kaufman
Working Papers



12-16-08 Deposit Insurance (Published in A. Berger, P. Molyneux and J. Wilson eds., The Oxford Handbook of Banking, Oxford University Press, co-author with Robert Eisenbeis)

8-6-08 Bank Fragility : Perception and Historical Evidence (Published in Towards a Framework for Financial Stability, D. Mayes, R. Pringle and M. Taylor eds, Central Banking Publications)

11-20-07 When a Bank is not a Bank

1-28-04 Macroeconomic Stability, Bank Soundness, and Designing Optimum Regulatory Structures

By George G. Kaufman
Executive Summary This paper focuses on the strong links between macroeconomic stability and bank soundness and argues that if the first is not achieved the second is not likely either with serious adverse consequences. Instability in banking is most often the result of actions by governments directed at the macroeconomy and banks to achieve short-run goals with little consideration for unintended immediate or longer-term consequences. Without government interference, there is little evidence that the banking system is unstable. This paper develops a framework for designing optimum regulatory structures that, if adopted by countries, will help to reduce instability in their banking systems and thereby also in their macroeconomies.

1-27-04 Minimizing Post-Resolution Costs in Bank Failures

By George G. Kaufman and Steven Seelig
Executive Summary Significant bank failures have been widespread in recent years, affecting almost every country with a banking system. Bank failures may generate two costs to domestic economies. One is a fiscal transfer cost from taxpayers to government protected stakeholders and the other is a slowdown or actual decline in aggregate real output that results in a loss in output from a trend or capacity level. The costs of bank failure may also be divided between credit losses from the shortfall in the value of assets from the value of liabilities and liquidity losses from the inability of depositors to access their accounts. Particularly in the U.S., the recent focus of attention has been on credit losses. But the fear of bank failures often centers around the fear of frozen accounts. This paper analyzes the importance of providing depositor liquidity at insolvent banks in order to limit the costs of bank failures and makes recommendations on how to provide such liquidity.

1-26-04 FDIC Losses in Bank Failures: Has FDICIA made a difference?

By George G. Kaufman
Executive Summary The FDIC Improvement Act (FDICIA) was enacted in 1991 in part "to resolve the problems of insured depository institutions at least possible long-term cost to the deposit insurance fund." This paper analyzes the losses to the FDIC from resolving bank insolvencies before and after FDICIA. It finds that, although the number of failed banks declined sharply, losses as a percent of assets of failed banks increased in the post-FDICIA period. Only if adjustments are made both for large losses at a few larger outlier banks and for differences in the size distribution of failures is the FDIC's loss rate reduced to below its pre-FDICIA rate. The paper concludes that, although the prompt corrective action provisions of FDICIA undoubtedly reduced losses, bank regulators should focus additional attention on detecting fraud and gross mismanagement at banks and on responding to simple red flags of danger, such as unusually rapid growth and too-good-to-be-true profitability, to reduce losses to the FDIC further.

11-11-03 Reforming Financial Markets for Structral Partnering

By George G. Kaufman
Executive Summary This paper reviews recent changes in cross-border financial activity in North America and particularly in the European Union, which is far more fragmented, to gauge the contribution of the financial sector to macro-economic growth and development. The paper finds increases in cross-border financial flows in recent years. But the increases vary greatly among countries and primarily reflect technological advances that permit explicit and implicit barriers to cross-border flows to be bypassed rather than the deliberate reduction or elimination of these barriers. In particular, bank mergers in EU countries appear to have been used more to grow domestic banks to repel cross-border invaders rather than to invade cross-border. Cross-border bank branching has also been limited to date. As a result, the financial sector has not made the contribution to the EU and particularly Euroland that it could.

11-10-03 A Proposal for Efficiently Resolving Out-of-the-Money Swap Positions at Large Insolvent Banks

By George G. Kaufman
Executive Summary Recent evidence suggests that bank regulators appear to be able to resolve insolvent large banks efficiently without either protecting uninsured deposits through invoking "too-big-to-fail" or causing serious harm to other banks or financial markets. But resolving swap positions at insolvent banks, particularly a bank's out-of-the-money positions, has received less attention. The FDIC can now either repudiate these contracts and treat the in-the-money counterparties as at-risk general creditors or transfer the contracts to a solvent bank. Both options have major drawbacks. Terminating contracts abruptly may result in large-fire sale losses and ignite defaults in other swap contracts. Transferring the contracts both is costly to the FDIC and protects the counterparties, who would otherwise be at-risk and monitor their banks. This paper proposes a third option that keeps the benefits of both options but eliminates the undesirable costs. It permits the contracts to be transferred, thus avoiding the potential for fire-sale losses and adverse spillover, but keeps the insolvent bank's in-the-money counterparties at-risk, thus maintaining discipline on banks by large and sophisticated creditors.

11-10-03 Basel II: The Roar that Moused

By George G. Kaufman
Executive Summary The proposed Basel II bank capital standards would change the in-place Basel I standards by attempting to measure risk-based capital requirements more accurately and adding two new pillars -- pillar 2 (supervisory review) and pillar 3 (market discipline). This paper reiterates much of the criticism of the pillar 1 capital requirements proposal made by others and focuses on the two new pillars. It finds that the proposal includes no recommendation for providing supervisors with tools and authority to take prompt corrective action on banks that require it and confuses market discipline with disclosure. While the proposal specifies in great detail the pillar three items that would be required to be disclosed, it fails to encourage increases in at-risk claims, a prerequisite for effective market discipline. Thus the paper finds it not surprising that Basel II does not live up to its billing and that an increasing number of national regulators are beginning to limit or reject implementation in its current form.

8-27-03 Bank Procyclicality, Credit Crunches, and Asymmetric Monetary
Effects: A Unifying Model

By Robert R. Bliss and George G. Kaufman
Executive Summary This article shows that the simple model of how monetary policy increases the assets held by the banking system by injecting new reserves and lowering interest rates may be incomplete. In practice, banks are subject to two constraints - capital and reserve requirements. Where capital requirements are binding, injection of reserves may not achieve the intended increase in bank earning assets and may even lead to a decrease. This helps to explain the possibility of a credit crunch.

8-12-03 Netting, Financial Contracts, and Banks: The Economic Implications

By William J. Bergman, Robert R. Bliss, Christian A. Johnson and George G. Kaufman
Executive Summary Derivatives and certain other off-balance sheet contracts enjoy special legal protection on insolvent counterparties through a process referred to as "close-out netting." This paper explores the legal status and economic implications of this protection. While this protection benefits major derivatives dealers and derivatives markets, it is less clear that other market participants or markets in general are better or worse off. While we are not able to conclude whether or not these protections are socially optimal, we outline the wide range of issues that a general consideration of the pros and cons of netting protection should take into cognizance, and analyze some of these issues critically. Ultimately the question becomes one of quantifying complex trade-offs.

8-11-03 Depositor Liquidity and Loss-Sharing in Bank Failure Resolutions

By George G. Kaufman
Executive Summary Bank failures are widely feared because depositors may suffer losses in the value of their deposits and restrictions in access to their deposits. In the U.S., this is not true for insured deposits, which are made fully available to depositors almost immediately. But both problems may occur for uninsured deposits. One way to mitigate liquidity loss to uninsured depositors is to make the estimated recovery value of their deposits quickly available to them by the FDIC. Such a policy would greatly enhance the FDIC's ability to resolve large bank insolvencies without having to protect uninsured depositors through too-big-to-fail policies.

1-10-03 Too Big to Fail in U.S. Banking: Quo Vadis?

By George G. Kaufman

10-02-02 The Use of Economic Analysis and Principles to Affect Public Economic Policy: The Case of the Shadow Financial Regulatory Committee

By George G. Kaufman

8-26-02 The Value of Banking Relationships During a Financial Crisis: Evidence from Failures of Japanese Banks

By Elijah Brewer III, Hesna Genay, William Curt Hunter, and George G. Kaufman

8-09-02 What have we Learned from the Thrift and Banking Crises of the1980's?

By George G. Kaufman

7-12-02 International Banking Regulation

By Maximilian J.B. Hall and George G. Kaufman

06-28-02 What is Systemic Risk and Do Bank Regulators Retard or Contribute To It?

By George G. Kaufman and Kenneth E. Scott

11-29-00   Safety-net reform in the United States : What's done and what remains

By George G. Kaufman and Peter J. Wallison
Executive Summary Federal legislation in recent years has significantly changed the structure of the government-sponsored safety-net under banks in the U.S. Perhaps the most important change is requiring increases in insurance assessments whenever FDIC losses from protecting insured deposits causes the FDIC reserve ratio to decline below 1.25 percent and the FDIC suffers any losses from protecting uninsured deposits because of too big to fail. Thus, in effect, deposit insurance is privately funded until all the banking system's resources are exhausted. As a result, the government's implicit backup guaranty is greatly reduced in importance. This paper argues that because of this change, the banks should be given an increased voice in managing the FDIC.


11-29-00   Does bank regulation retard or contribute to systemic risk? 

By George G. Kaufman and Kenneth E. Scott
Executive Summary Systemic risk in banking in which the failure of one or a few large banks ignites the failure of a larger number of other banks and possibly also of other firms is a feared event. Indeed, much prudential regulation and the government safety-net, including deposit insurance, were both put in place to prevent or minimize the probability of its occurrence. This paper examines both bank systemic risk, including its definition, the perceived potential damage and the historical evidence, and the effectiveness of regulatory intervention in preventing or mitigating the threat. The paper concludes that while a threat in theory, in practice, banks appear to protect themselves rather well against systemic risk and that few if any banks that are economically strong fail because of either the failure of other banks or runs by depositors. The safety-net, on the other hand, tends to increase the fragility of banks by reducing depositor monitoring. If underpriced, as is usual, deposit insurance also increases both moral hazard risk taking behavior by banks and regulatory forbearance for troubled banks, which increase the likelihood and cost of bank failures. The paper makes recommendations on how to reduce the cost of bank failures by increasing reliance on market discipline at the expense of decreasing regulation and aligning regulatory discipline to be more consistent with market discipline. 


11-27-00   Post-resolution treatment of depositors at failed banks: Implications for the severity of banking crises, systemic risk, and too-big-fail. 

By George G. Kaufman and Steven A.Seelig
Executive Summary Losses may accrue to depositors at insolvent banks both at and after the time of official resolution. Losses at resolution occur because of poor closure rules and regulatory forbearance. Losses after resolution occur if depositor access to their claims may be delayed or "frozen" because of both technical problems in certifying the amount and ownership of protected deposits and in estimating recovery values and lack of legal authority by the government to advance funds to the depositors before they are received from the receivers. While the sources and implications of losses at resolution have been analyzed previously, the sources and implications of losses after resolution have received little attention. In the U.S., these losses are currently minimal as the FDIC can both identify protected deposits and depositors and estimate recovery values and advance funds to depositors within one or two days after official resolution. But this is not true in most other countries. Partially as a result of the fear of freezing deposits if a resolution involves losses, many of these countries do not resolve insolvent banks or protect all depositors if they do. This paper examines the causes of delayed depositor access to their funds at resolved banks, describes how the FDIC provides immediate access, reports on a special survey of access practices in other countries, and analyzes the costs and benefits of delayed access in terms of both the effects on market discipline and depositor pressure to protect all deposits.


11-13-00   Emerging Economies and International Financial Centers

By  George G. Kaufman
Executive Summary A number of emerging economies are either directing or considering directing public resources to developing an international financial center (IFC) in their country. They are doing so because of the perceived advantages of IFCs, including high value added, quick development, and low fixed-cost plant and equipment. But being an IFC also has costs, including high fragility, spillover of problems from the center to the domestic economy, and quick departure of footloose human capital. This paper evaluates the benefits and costs of becoming an IFC, enumerates the characteristics of IFCs, traces the history of IFCs, and describes recent changes in the ranking of major IFCs. It concludes that this may not be an opportune time for emerging economies to devote public resources to developing an IFC. 


11-15-99   Banking and Currency Crises and Systematic Risk: A Taxonomy and Review

By George G. Kaufman
Executive Summary This paper analyses the causes of the banking and currency crises that have plagued most countries throughout history, but particularly in recent years. It attempts to develop an analytical framework that is common to both types of crises. The framework is applied to analyze recent crises and, in particular, the possibility of systemic risk or contagion and recommendations are made to avoid such crises in the future or at least minimize their adverse impacts.
Update:   This paper is published in FINANCIAL MARKETS, INSTITUTIONS, and INSTRUMENTS, May 2000


05-10-99  How Real is the Risk of Massive Banking Collapse? Evaluating the Latest Methods Proposed to Maintain Stability in International  Financial Markets and to Minimize Systematic Risk

By George G. Kaufman
Executive Summary Many countries have experienced painful banking crises in recent years. This has given rise to fears that these crises will intensify in the future and spillover to more countries. This paper analyzes the causes of bank failure, the conditions for domestic and transnational contagion, and the empirical evidence and proposes solutions for reducing the probability of both bank failure and systemic risk.
Update:   This paper is published in REGULATION vol 23, no 1, 200






Masters in Business AdministrationGraduate School of BusinessLoyola University Chicago
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